Domestic Savings in India: Subject-Matter and Estimate

In this article we will discuss about Domestic Savings in India. After reading this article you will learn about: 1. Subject Matter of Domestic Savings in India 2. Estimates of Domestic Savings in India 3. Increase in Saving Ratios during the 1970s 4. Factors Responsible for Increase in Saving Ratio and Others.

Subject Matter of Domestic Savings in India:    

In India, domestic saving has been considered as one of the major sources of capital formation. The Central Statistical Organisation (CSO) has been preparing the estimates of domestic saving for the entire planning period of the country.

Saving has been defined by CSO, “The excess of current income over current expenditure and is the balancing item on the income and outlay accounts of producing enterprise and households, government administration and other final consumers.”

For the estimation of domestic savings, the whole economy is broadly classified into three institutional sectors.

These include:

(a) Household,

(b) Private corporate and

(c) Public.

The saving of the household sector can be measured by:

(i) Total financial saving and

(ii) Saving in the form of physical assets.

The financial saving includes possession of currency, net deposits, investment in shares, debentures and government securities and small savings whereas, the physical assets include machinery, equipment, construction, inventories etc. held by individuals.

Secondly, the saving of the private corporate sector constitutes the net saving of non-government, non-financial companies, private financial institutions and co-operative institutions as revealed from the profit and loss accounts placed in the balance sheet of these companies.

Thirdly, the saving of the public sector includes the net savings of both departmental and non- departmental enterprises and savings of administrative departments shown as the excess of current receipts over current expenditures of the government.

Estimates of Domestic Savings in India:

It would be of high interest to look into the estimates of gross domestic savings in India since the inception of planning. The Central Statistical Organisation (CSO) has estimated the gross domestic savings of the country as a ratio of GDP at market prices.

In India the rate of gross domestic savings which was very low during initial period of planning has gradually increased to a moderate level. The following table shows the rate of gross domestic savings since 1950-51.

The above table reveals the growth of gross domestic savings as in percentage of GDP at current price since 1950-51 to 2013-14. During these six decades of planning, the rate of gross domestic savings has increased considerably but this increase in its rate was not commensurate to the expectation of the planners of our country.

The CSO estimates show that the rate of gross domestic savings was only 9.5 per cent in 1950- 51 which was again dominated by the household sector (6.5 per cent). With this poor rate of domestic savings, it was quite difficult to achieve a 5 per cent growth rate in GDP per annum.

During the Second Plan, the domestic savings rate was slightly increased to 11.6 per cent in 1960-61. Thus during the initial part of economic planning in India the saving rate was very low. At the end of the Third Plan, the saving rate was increased to 14.2 per cent, which was still considered insufficient for financing the development of heavy industry necessitating heavy reliance on foreign aid.

In the terminal year of the Fourth Plan (1973-74), the saving rate gradually increased to 16.8 per cent which was again considered as inadequate in comparison to its requirement necessitating continuation of the reliance on foreign aid. After the Indo-Pak War, India failed to acquire adequate amount of foreign aid due to certain political factors.

The CSO’s estimates further reveal that this saving rate rose steadily to 21.0 per cent in 1978-79. This achievement of high rate of savings was remarked by Professor K.N. Raj as a “rather dramatic improvement”. In this connection, the planning commission admitted that, “It is apparent that the country has achieved a high savings rate despite its low per capita income. In fact our saving rate is comparable to the rate in middle- income and even some high-income industrialised countries.”

After that the saving rate declined to 19.9 per cent in 1979-80 due to certain adverse factors like poor harvest. But in 1980-81, the rate of saving remained at 17.8 per cent inspite of positive improvement in the real income. This declining trend continued till the end of the Sixth Plan where the saving rate declined to as low as 17.8 per cent in 1984-85.

The RBI report stated that, “This declining trend continued till the end of the Sixth Plan where the saving rate decline as low as 17.8 per cent in 1984-85. The RBI report stated, that “This decline in saving would suggest an erosion in saving capacity following persistent rise in prices and consequent increase in consumption expenditure.”

Again during the Seventh Five Year Plan, the saving rate gradually started to increase at a very slow rate and reached the level of 21.3 per cent in 1989-90 and thus the Seventh Plan target level of 24.5 per cent by 1989-90 was not fulfilled. Again the saving rate reached the level of 33.9 per cent in 2011-12, i.e., at the end of Eleventh Plan and then it reached to 30.6 per cent in 2013-14.

Thus throughout these five decades it can be observed that among the various heads of gross domestic savings, household sector dominated the show and both private corporate sector and the public sector maintained low profile in the generation of savings.

Increase in Saving Ratios during the 1970s and Factors Responsible:

Another interesting feature that this savings data reveals is that although the ratio of net domestic savings more than doubled itself during the period 1960-61 to 1978-79 but the rate of growth of national income and per capita income did not show proportionate increase.

The net domestic savings which was 9.3 per cent NNP in 1960-61 gradually increased to 19.7 per cent in 1978-79 but with it the rate of growth of national income during the first decade of planning, i.e., from 1950-51 to 1960-61 was 3.8 per cent per annum. The same rate again declined to 3.0 per cent per annum during 1960-61 to 1969-70 and then improved marginally to 3.3 per cent per annum during 1970-71 to 1979-80.

This is no doubt a peculiar problem where we have attained a high saving ratio but could not attain a moderate growth rate for our economy to the extent of even 5 per cent during the 1970s.

Considering this peculiar problem, Mr. M. Narasimham wrote, “While our saving and investment have thus more than doubled, our growth performance has not been particularly impressive over the period………….. Over the 30 years span, the annual growth rate has been no more than 3.7 per cent and provides the basis for Prof. Raj Krishna’s epigram about ‘Hindu rate of growth’. This has meant, given the demographic compulsions of our situation, annual per capita income growth rate of 1.5 per cent.”

Thus under this situation a definite question arises—Why the Indian economy could not respond to the high saving ratio in terms of attaining a higher growth rate?

Factors Responsible for Increase in Saving Ratio:

Saving ratio in India increased considerably during the 1970s. Introduction of Compulsory Deposit Scheme and increased inflow of inward remittances have helped a lot to raise the domestic saving ratio. Even if we exclude these two exogenous factors still the rate of domestic saving has reached the level of 16 to 18 per cent which showed a persistent break from low level of saving attained during earlier periods.

Three factors, as explained by S.L. Shetty and K.L. Menon, were responsible for this extraordinary increase in the saving ratio in India during the 1970s:

(a) Voluminous increase in inflationary financing was responsible for acceleration of saving in the form of financial assets;

(b) Movement of terms of trade against agriculture has helped a lot in increasing the savings in the non- farm sectors;

(c) A sharp increase in the distribution of money in favour of the rich boosts the savings in the form of financial assets.

Fall in Saving Ratios during the 1980s and Factors Responsible:

During the 1980s, the saving ratios in India started to decline gradually. Table 4.1 shows that gross domestic savings as per cent of G.D.P at current prices gradually declined from 18.0 per cent in 1980-81 to 17.8 per cent in 1984-85 and then started to increase slowly to 18.4 per cent in 1985-86, 20.0 per cent in 1987-88 and then to 21.3 per cent in 1989-90.

Similarly, the net domestic savings as per cent of NNP also started to decline from 17.8 per cent in 1980- 81 to 16.4 per cent in 1983-84 and then stood at 16.7 per cent in 1985-86.

Thus the saving ratios in India maintained a low profile during the 1980s in comparison to that of 1970s. The target level of gross domestic savings (as per cent of GDP) in India at the end of the Seventh Plan was 24.5 per cent whereas the country could achieve only 21.7 per cent level by 1989-90 showing a shortfall of 2.8 per cent.

Thus the rate of saving in India is still below the warranted and expected rate of saving and factors which are responsible for this problem are mentioned below:

1. Low per capita income:

At this poor level of per capita income, raising the saving ratio has its limit.

2. Unrealised rural savings:

In India the saving potential of the agricultural sector has not yet been realised. Moreover, agricultural income of rich farmers in India is still exempted from income tax creating huge concentration of income and wealth in the hands of few big and large farmers.

This has encouraged extravagant expenditure and raised the demand for non-essential durable goods in the rural areas and in this way a huge saving potential largely remained under-utilised throughout the country.

3. Demonstration effect in urban societies:

Urban people in India are very much influenced by consumption habits and life style of western people leading to an increase in conspicuous consumption and this tendency can be termed as demonstration effect. This tendency reduces the propensity to save of Indian people in general.

4. Poor contribution of the private corporate sector:

Indian Private Corporate Sector is contributing a very little amount to domestic savings. Over the last 40 years its contribution never exceeded 10 per cent of gross domestic savings. Low level efficiency, lower profitability due to high cost of inputs, misuse of funds by Company directors and faulty dividend declaration are responsible for low saving potential of private corporate sector.

5. Poor return of the public sector:

The public sector in India is contributing very little (7.8 per cent in 1989-90) towards gross domestic savings of the community and the contribution would be negative if we consider the large dissaving of the administrative departments.

The steadily growing unproductive public expenditure and the low profitability of state undertakings are two major factors which are responsible for this low return of the public sector towards domestic savings.

Increase in Saving Ratios during the 1990s:

The saving ratios in India have been recording the moderately increasing trend during the 1990s. CSO estimates show that the rate of gross domestic savings which was 21.3 per cent of GDP in 1989-90, gradually rose to 22.9 per cent in 1990-91 and to 23.6 per cent in 1994-95 and then finally to 32.3 per cent in 2010-2011.

Among the various heads of gross domestic savings, household sector dominated the show and both the private corporate sector and the public sector maintained a low profile in the generation of savings. The rate of growth of gross domestic savings from the household sector which was 17.0 per cent of GDP in 1989-90, gradually rose to 18.4 per cent in 1990-91 and then it declined to 16.4 per cent in 1992-93 and then again increased to 23.5 per cent in 2009-10.

While both the private corporate sector and public sector maintained a low profile during 1990s, the rate of growth of savings in the private corporate sector maintained slowly increasing trend from 2.4 per cent in 1989-90 to 8.1 per cent in 2009-2010. The rate of savings of the public sector maintained at the low level of 2.8 per cent in 1988-89 to 2.1 per cent in 2009-10.

Another interesting point to be noticed is that during 1990s, the growth of gross domestic saving is also supported by a moderate increase in the rate of growth of national income, i.e., from 5.4 per cent in 1990-91 to 7.2 per cent in 1994-95 and then to 9.2 per cent in 2005-06.

Considering this situation, it can be observed that perhaps, the Indian economy has started to respond slowly to the high saving ratio in terms of attaining a higher growth rate, particularly after the adoption of the policy of economic reforms.

Factors Responsible for Increase in Saving Ratio:

Saving ratio in India has been increasing moderately during the 1990s.

The factors which are mostly responsible for this increase in the saving ratio during the 1990s are:

(a) Moderate increase in the rate of growth of national income has helped the country to raise its savings ratio;

(b) Increasing flow of foreign direct investment to India has also been helping to raise the domestic saving ratio as an exogenous factor;

(c) Voluminous increase in inflationary financing was responsible for acceleration of savings in the form of financial assets;

(d) Increase in the contribution of private corporate sector to gross domestic savings has also helped to raise the saving ratio during 1990s;

(e) A sharp increase in the distribution of money in favour of the rich boosts the savings in the form of financial assets.

The saving rate of the Indian economy which is already high needs to rise further given the growing investment demand. The savings rate of some of the fast growing east Asian countries is four to five per cent higher than the Indian savings rate and, therefore, in ensuring a higher growth rate, there is no doubt that India must bring about an increase in the saving rate.

The Reserve Bank of India has recently observed that there is an imperative need to further raise the savings rate in order to sustain the economic growth at seven per cent and above. In its Report on Currency and Finance for 1995-96, the RBI observed that the savings rate of the country should be raised above seven per cent for raising the growth rate of the economy.

Suggestions for Raising the Saving Ratio:

Raising the saving ratio is of utmost importance in a developing country like India.

To achieve this objective, the following measures are worth mentioning:

The Household Sector:

Steps be taken for inducing the upper and middle classes to increase their savings.

To fulfill this objective the following measures may be followed:

(a) Restriction in the production of non-essential durable goods for reducing conspicuous consumption;

(b) Raising the exemption limit of savings for income tax;

(c) Inculcating banking habit among the rural population.

The Private Corporate Sector:

For raising the contribution of this sector, saving potential of this sector be raised.

The measures which are suitable in this direction are:

(a) Restricting the expenditures of company executives and directors;

(b) Fixing reasonable ceiling on the salaries and perquisites of company officials and

(c) Controlling the declaration of dividends by the state.

The Public Sector:

The public sector in India has lot of potentialities for raising the rate of savings.

To utilise this potentiality the following measures should be undertaken:

(a) Imposing income tax on agricultural income with its increasing commercialisation;

(b) Taxing luxury commodities at heavy rate;

(c) Plugging the loopholes for checking widespread tax evasion;

(d) Restricting unproductive expenditure of the government;

(e) Raising the efficiency of public sector undertakings;

(f) Utilisation of excess capacity of public sector undertakings and also raising their efficiency;

(g) Following the policy of rational administered prices for eliminating losses incurred by public sector undertakings;

Thus for raising the saving ratio of the country whole hearted efforts should be undertaken in all the above mentioned sectors.